Even as the average interest rate on a 30-year fixed-rate loan fell last week to 5.96%, the lowest point since September 2005, many subprime ARM borrowers will have trouble refinancing under the Bush administration's plan. That's largely because the qualifications are strict. Borrowers must live in their homes, be current on their loans and not have been more than 60 days late on a payment more than once in the previous 12 months.
More than half the borrowers who got subprime ARMs last year, for example, provided little or no documentation of their income. These loans are nicknamed "liar loans" in the industry. It's unclear how many borrowers who got this type of loan will be able to qualify for a new loan.
In September, the Federal Housing Administration launched a loan insurance program called FHASecure, designed to help borrowers refinance out of their subprime ARM loans. In the first three months, the FHA received 111,000 applications for the FHASecure loan but has funded fewer than one-third.
"It's a nice attempt, but I've submitted two (applications), and both were denied," said Pava Leyrer, a mortgage broker and president of Heritage National Mortgage in Grand Rapids, Mich. "There are lots of lenders saying they offer the program, but I'm not finding anyone who will do the loan," she said. "I don't think lenders are comfortable with it."
In Michigan, one in four borrowers with a subprime ARM is in default. Last month, the Wayne County treasurer's office ran a 121-page foreclosures notice in the Detroit Free Press. Community housing advisers say they've never seen so many people come through their doors looking for help paying their mortgages.
President Bush's promise to freeze mortgage rates is a welcome first step, says Deborah Jones, president of the Detroit Alliance for Fair Banking, but more needs to be done.
"These foreclosures are like some sort of evil that has come to steal, kill and destroy the American dream," Jones says. "We have to have corporate leaders and the government say, 'This is massive — thousands of people are being affected. What can we do to provide a win-win solution for everyone?' "
Michigan's high unemployment rate and massive job losses in the auto industry are partly to blame. The state is seeing its longest stretch of job losses since the Great Depression, say economists at the University of Michigan. From 2000 to 2006, the state lost 336,000 jobs and is predicted to lose an additional 33,000 by the end of 2008.
Across Detroit, homes are being boarded up and vandalized, and the shred of a downtown revival the city has seen in recent years is threatened if residents in the rest of the city can't hang on to their homes.
Elmira Smith-Vincent, founder of Mission of Peace Community Development Corp. in Flint, Mich., says the number of people coming to her agency looking for help paying their home bills has skyrocketed in the past year. What's most worrisome, she says, is that it's no longer isolated to just low-income homeowners. Even traditionally middle-class homeowners are now seeking help.
Bush said Thursday: "We should not bail out lenders, real estate speculators or those who made the reckless decision to buy a home they knew they could never afford. Yet there are some responsible homeowners who could avoid foreclosure with some assistance."